Relative of Palestinian toddler Ali Dawabsheh, who was killed after his family's house was set on fire, shows his picture at the burnt house in Duma villageReuters

Palestinian militant group Hamas has called all Israeli soldiers and settlers "legitimate targets" after suspected Jewish settlers set ablaze a Palestinian home in the occupied West Bank's village of Duma, near Nablus, killing a toddler and critically wounding four other members of the family.

Hamas spokesman Husam Badran said the Islamist group, which rules in the Gaza Strip, blames the Israeli government for the killing of 18-month-old Ali Saad Dawabsheh in a price-tag arson attack.

"This crime makes legitimate targets out of Israeli soldiers and settlers for the resistance everywhere," said Badran. He called on the Palestinian Authority, which rules in the West Bank, to stop "chasing fighters" and release all political prisoners detained during raids against Hamas members.

Earlier in July, Hamas called for a "Day of Rage" to be held after Friday prayers, after Israeli forces fired stun grenades and rubber bullets at Palestinian activists in front of the al-Aqsa mosque in Jerusalem.

The latest attack was also condemned by the Islamic Jihad movement. "Settlers and the Israeli army's terrorism will be faced by a Palestinian will that does not accept surrender," a spokesperson for the group said.

Jewish settlers allegedly entered the village of Duma, near Nablus, and threw Molotov cocktails from the bedroom window of a house of a Palestinian family, scrawling graffiti on the walls reading "Long live the Messiah", "revenge", and "price tag". They also flung a burning object inside causing the fire to set off quickly.

The Palestine Liberation Organization (PLO) has said it holds the Israeli government "fully responsible" for the brutal assassination. Palestinian chief negotiator Saeb Erekat called the assassination "a direct consequence of decades of impunity" given by the Israeli government to extremist settlers.

"We cannot separate the barbaric attack that took place in Duma last night from the recent settlement approvals by the Israeli government, a government which represents an Israeli national coalition for settlements and apartheid," he said in a statement. "By continuing to approve settlements and incite against Palestinian presence, including calls to recognise Israel as a Jewish State, the Israeli government has paved the road for this brutal act."

Palestinian president Mahmoud Abbas said he will appeal to the International Criminal Court (ICC) to investigate the arson attack. "We are immediately preparing the file that will be submitted to the ICC," Abbas told reporters, while also denouncing "war crimes and crimes against humanity committed each day by Israelis against the Palestinian people".